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Guidance issued on new $2,500 FSA limit

The IRS on Wednesday released Notice
2012-40 providing guidance on implementation by employers of the
$2,500 annual limit on employee salary reduction contributions to
health flexible spending arrangements (health FSAs). The notice also
requests comments on possible changes to the current “use-or-lose”
rules for health FSAs.

The $2,500 limit, enacted by the Patient Protection and Affordable
Care Act of 2010, P.L.
111-148, and amended by the Health Care and Education
Reconciliation Act of 2010, P.L.
111-152, is effective with cafeteria plan years beginning after
Dec. 31, 2012, and is indexed for inflation in subsequent years. Under
previous law, the health FSA statutory provisions contained no
contribution limit, although proposed regulations issued in 2007 would
have required employers to set a maximum. Under Sec. 125(i), as added
by the health care legislation, references to “taxable year” or years
are to be interpreted as plan year or years, the IRS clarified.

Other clarifications in the notice include:

The limit is per employee. If a husband and wife both work for
the same employer, each may make contributions of $2,500 per year.

The limit applies to all employers that are treated as a single
employer under Sec. 414 as a controlled group or affiliated service
group.

If a plan provides for a “grace period” of up to two months and 15
days in which salary contributions otherwise subject to health FSAs’
“use-or-lose” rules may be used by the employee, the carryover does
not count against the subsequent plan year’s limitation.

If, by a reasonable mistake, an employer (that is not under audit
for a cafeteria plan issue) or agent allows an employee to elect a
salary reduction exceeding the maximum, and the excess is paid to
the employee and reported as wages, the cafeteria plan will not
cease to be a valid plan for that plan year.

Regarding the use-or-lose rules, the IRS requests comments
particularly on any additional flexibility besides the grace period
that could be provided and how such modifications would interact with
the annual contribution limit. Comments must be submitted by Aug. 17,
2012, in a manner outlined and to an address contained in the notice.